Live Ventures Incorporated — Fiscal Q1 2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; filed April 13, 2020. Unless noted otherwise, amounts are in millions of dollars. The company is a holding company with Manufacturing (Marquis), Retail and Online (Vintage Stock and ApplianceSmart), and Services (directory services) segments.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $42.0 | $53.2 | Down 21% |
| Gross profit / margin | $16.6 / 39.6% | $19.3 / 36.4% | Profit down 14%; margin up |
| Operating income / margin | $3.5 / 8.3% | $2.1 / 3.9% | Up 67% |
| Net income / margin | $0.5 / 1.3% | $1.5 / 2.9% | Down 64% |
| Basic / diluted EPS | $0.30 / $0.15 | $0.79 / $0.41 | Both lower |
| Operating cash flow | $3.0 | $8.2 | Down $5.3 |
Revenue declines chiefly reflected ApplianceSmart store closures during fiscal 2019 and the prior-year sale of equipment used in Marquis’s synthetic-turf business. Retail and Online revenue fell 30% to $21.5 million; Manufacturing revenue fell 9% to $20.4 million. Operating income improved as lower operating costs more than offset lower gross profit: Retail and Online reported $0.9 million of operating income versus a prior-year loss, while Manufacturing earned $2.4 million, broadly stable. Services remained small and management said it expects further declines as directory renewals decrease; it is no longer accepting new customers.
Net income was materially below the prior year despite higher operating income. The comparison included a $1.207 million impairment charge for planned ApplianceSmart store closures and $1.660 million of prior-year other income, including a $1.518 million gain on sale of the synthetic-turf business. Net interest expense declined to $1.357 million from $1.653 million. The filing’s MD&A calls net income “comparable” to the prior period, but the reported figures show a decline from $1.530 million to $0.547 million.
Financial position, debt and liquidity
- At December 31, 2019, cash was $1.502 million and total assets were $136.2 million. Total liabilities were $101.6 million and stockholders’ equity was $34.6 million.
- Working capital was $4.4 million, versus $20.7 million at September 30, 2019. The reduction primarily reflected higher current liabilities, including newly recognized operating lease obligations, higher current debt and ApplianceSmart debtor-in-possession liabilities.
- Cash declined $1.179 million during the quarter. Investing activities used $0.645 million and financing activities used $3.533 million; operating activities provided $2.999 million.
- Reported notes payable totaled $52.522 million gross ($51.259 million net of unamortized debt issuance costs), excluding $4.826 million of related-party notes. Current and long-term portions of net debt were $15.989 million and $35.270 million, respectively. Operating lease liabilities totaled $19.879 million.
- Available borrowing at quarter-end was $14.387 million under Marquis’s Bank of America revolver and $2.493 million under Vintage Stock’s Texas Capital Bank revolver. The filing reported $9.507 million outstanding on the latter and $0.541 million on the former.
- Management stated that cash, operating cash generation and revolver availability were expected, based on plans as of December 31, to fund operations and obligations for at least 12 months. This assessment predates the disclosed COVID-19 disruption.
Material events, outlook and risks
- ApplianceSmart Chapter 11: The subsidiary filed for Chapter 11 on December 9, 2019 and continued operating as a debtor in possession. The filing says the bankruptcy affects ApplianceSmart, not the parent or its other subsidiaries. It reported $2.688 million of debtor-in-possession assets and $13.568 million of debtor-in-possession liabilities at quarter-end. The company continued consolidating ApplianceSmart while evaluating whether it retained control.
- Store closures: The company recorded the $1.207 million impairment related to additional ApplianceSmart closures; the locations physically closed in the quarter ending March 31, 2020. By March 31, ApplianceSmart had one operating store. The filing also says Vintage Stock closed all retail locations by March 31 in response to COVID-19; reopening timing was uncertain.
- COVID-19: Management warned that disruptions to store traffic, supply chains, consumer spending and operations could materially adversely affect revenue, earnings, liquidity and cash flow. The duration and financial impact could not be estimated clearly in the filing.
- Debt and covenant developments after quarter-end: The filing reports that the company was compliant with loan covenants at December 31 except for Crossroads Revolver covenants. In April 2020, Comvest and Texas Capital Bank granted waivers related to certain Vintage Stock defaults and covenant testing. Comvest’s amendment set an 8.75% LIBOR margin for May–August 2020, deferred a July amortization payment to no later than August 1, and contemplated covenant discussions and additional company equity contributions. These waivers and conditions warrant close monitoring.
- Other subsequent financing and transactions: On January 31, 2020, Marquis completed the $2 million Lonesome Oak acquisition. Marquis also entered a $5 million equipment loan in February. In March, Live Ventures guaranteed up to $1.2 million of ApplianceSmart obligations to Crossroads. In April, the company entered a $1 million unsecured revolving facility with Isaac Capital Group, a related party, at 10% interest, maturing in April 2023.
- Debt maturities: The Bank of America revolver was due in July 2020 at quarter-end; a January 31, 2020 amendment increased its size from $15 million to $25 million and extended maturity to January 2025. The Texas Capital Bank revolver was due in November 2020. The filing details additional leverage, fixed-charge and operating covenants under the Vintage Stock term loan.
- Controls and investigations: Management concluded disclosure controls were ineffective and described material weaknesses, including insufficient segregation of accounting duties, inadequate written control documentation, and weaknesses in control evaluation and reconciliation documentation. A remediation timetable was not specified. The company also disclosed an ongoing SEC investigation begun in 2018 concerning prior financial-statement restatements, acquisitions and auditor change; it said it was cooperating.
- Formal guidance: No specific revenue or earnings guidance was provided. Management’s outlook emphasized acquisition activity but acknowledged substantial uncertainty from COVID-19, store closures and financing conditions.
Most important facts for investors to verify
- Current ApplianceSmart Chapter 11 status, creditor recoveries, store footprint and any effect on Live Ventures’ consolidation or cash support obligations.
- Vintage Stock’s post-waiver covenant compliance, liquidity, required equity contributions and availability under its Texas Capital Bank and Comvest facilities.
- The cash-flow and revenue impact of COVID-19 store closures, including reopening status and whether further closures or liquidity measures were required.
- Whether management remediated the disclosed material weaknesses and whether the SEC investigation or other litigation has materially progressed.
- Actual borrowing capacity and near-term debt maturities, distinguishing reported debt from lease liabilities and debtor-in-possession obligations.